If you run a business or have sophisticated personal holdings, the concept of “capital gains” and “capital losses” may be quite familiar to you. As you likely know, capital property consists of that category of assets and property that is depreciable, and includes things that you can own and sell as desired, like business equipment, furniture, securities (in the form of shares and stocks), real estate, and even intangibles (like goodwill).
As compared to the amount you initially paid for it (a figure that for tax purposes takes into account certain related costs and is known as the adjusted cost base), you will trigger a capital gain or capital loss depending on whether you sell your capital property for more or less than the adjusted cost base, respectively.
Capital gains and capital losses are recorded for Income Taxes purposes, although in both cases you are allowed to deduct any legitimate expenses that you incur in the course of selling your capital property.
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But what you may not realize is that as a separated or divorcing parent, capital gains and capital losses can have a big impact on how any child support obligations you may have will be calculated.
In this specific context, here are the main points to know:
1. Capital gains are considered income for child support purposes.
Under the Federal Child Support Guidelines, capital gains are reported as part of the income that a court will consider in setting how much child support you are required to pay. This is provided for right in the Guidelines (in sections 15 through 19 and Schedule III, item 6).
Note that for these specific purposes, it is the actual, net amount of any capital gains that must be added to your reported Guidelines income for the year; this may be different from the amount you report for Income Tax purposes.
2. Capital losses are deducted from capital gains. The Guidelines set out a straightforward approach to capital losses, directing that for child support income determination purposes the amount you report for your capital gains is only that amount that is “in excess” of your capital losses (Again, see item 6 in Schedule III of the Guidelines).
3. There might be exceptions. In terms of reporting the income that will form the basis for your Guidelines-driven child support obligations, the law does recognize that sometimes there will be out-of-the-ordinary capital gains or capital losses in any given year. Because these unusual or one-off events are a marked departure from the norm, they can skew your overall financial picture by unduly inflating or reducing your income – which in turn directly impacts your child support obligations.
Section 17 of the Guidelines expressly accounts for this, by allowing a court to make adjustments in appropriate cases to arrive at the fairest determination of your annual income. For example, it allows a court to use its discretion to adjust the amount of a “non-recurring capital or business investment loss”, including related expenses, carrying charges and interest expenses, if to do otherwise would not result in the fairest determination of your annual income.
Using this leeway, courts can avoid applying the normal rules to your child support calculation if warranted. Note that if you are the person arguing for such a deviation, it will fall to you to convince the court that it is justified in your circumstances.
It’s important to get good family law advice when contemplating the sale of capital assets, so that you fully understand how – in addition to having the usual tax repercussions – any capital gain or capital loss might “flow through” to affect your child support obligations as well.